Now is a good time, while tax season is fresh in your mind, to prepare for next year and to make plans to pay as little tax as possible. Here are two goals for everyone:
- Eliminate or reduce taxes on income you’re not spending.
- Minimize taxes on income you are spending.
That income could be from Social Security, income annuities or from interest, dividends and capital gains. It doesn’t matter whether you’re planning for retirement or in retirement, minimizing your tax bill is a worthy objective.
Tailor tax plans to your life goals
- If you are 10 or more years from retirement – a younger Boomer or older Gen-Xer — and you have savings outside of a rollover IRA or 401(k), consider a no-load variable annuity. This is a low-cost vehicle that lets you invest the money in stock and bond mutual funds and defer taxes on the earnings from those funds at the same time. Think of these savings as a source of future retirement income rather than money that will one day be passed on to your heirs. When you retire and need to generate income, a no-load variable annuity can be exchanged in full or in part into an income annuity that pays guaranteed lifetime income. When you begin receiving the income to meet your expenses, a portion of each payment is received tax-free.
- When you reach retirement, your retirement income needs to meet your basic living expenses. Investing part of your savings in an income annuity does that. Since a portion of that income can be free of taxes, it might lower your tax rate and possibly reduce the portion of your Social Security payments that is taxable. Additional income from your stock portfolio, if made up of dividends, will be taxed at the lower rate.
- If you have accumulated enough wealth that you can plan for a legacy to your children or charitable organizations, consider putting that money into a portfolio that minimizes turnover leading to short- or long-term gains. Look into a tax-managed portfolio with a reasonable level of dividends. At your passing, the government allows the stocks to be “stepped-up” to their current value, and thus avoids the capital gains tax on unrealized appreciation. Importantly, this is also available for jointly-owned accounts.
Plan and prepare for taxes
Retirees who do a good job of reducing taxable income may find themselves in a lower tax bracket. While planning for retirement, factor taxes into your calculations. You will need to have the money to pay taxes, but you want to pay it at lowest possible rate.